PublicationTitle: A Better Way to Borrow
What is the William D. Ford Federal Direct Loan
This program, called "Direct Loans" for short,
provides another way to borrow money to pay for
education after high school. Schools that
participate in Direct Loans receive loan funds
directly from the U.S. Department of Education and
disburse them to eligible students. (Under the
current Federal Family Education Loan [FFEL]
Program, loans must be made through private
lenders and guaranty agencies.)
Every school does not participate in Direct Loans.
Students should check to see if the schools they're
interested in participate.
What loans are available under the William D. Ford
Federal Direct Loan Program?
There are four kinds of loans:
+ Federal Direct Stafford/Ford Loans--also called
Direct Subsidized Loans. The federal government
pays the interest on these loans while students are in
school at least half time and during certain periods,
such as grace and deferment (a postponement of
repayment). Students must demonstrate financial
need to receive this type of loan. (The school
determines financial need based on the information
provided on a financial aid application.)
+ Federal Direct Unsubsidized Stafford/Ford
Loans--also called Direct Unsubsidized Loans.
Students can get these loans regardless of financial
need but will have to pay all interest charges.
+ Federal Direct PLUS Loans--for parents of
dependent students to pay for their children's
education. Parents are responsible for all
+ Federal Direct Consolidation Loans--one or more
federal education loans combined into one new
Direct Loan. Only one monthly payment
is made to the U.S. Department of Education. In
certain circumstances, students who have loans
under the FFEL Program may consolidate them into
What are the advantages of Direct Loans for student
and parent borrowers?
The Direct Loan Program provides a simpler and
much faster way to obtain loans. Borrowers receive
funds from their schools in days.
There is only one lender--the U.S. Department of
Education. The Department will not sell the loans,
which means the student or parent will always make
payments to one place--the Department's Direct
Loan Servicing Center. Even if a student receives
loans at different schools, he or she will deal with
only one Servicing Center. Having only one contact
point means borrowers will always know where to
send their payments and where to call or write if
they have questions about their loans. Plus,
borrowers will not have to seek deferments or
forbearances (postponements of repayment) from
multiple lenders and/or guaranty agencies.
Students and parents have several repayment
options; they can pick the repayment method that
best fits their financial circumstances (see
page 9 for more information). Also, students and
parents are not restricted to one repayment plan for
the life of their loans; they can change plans if their
financial circumstances change. Flexible repayment
options and a simple repayment process reduce the
chance of default.
How do students and parents apply for Direct
Students fill out a single application--the Free
Application for Federal Student Aid (FAFSA), the
same application they use for most other student
aid. Students can get FAFSAs from their schools.
The U.S. Department of Education uses the
information from the FAFSA to determine each
student's Expected Family Contribution (EFC)--the
amount the student's family is expected to
contribute toward college costs. The school then
uses the EFC to determine the financial aid each
student needs, which is important in awarding
Direct Subsidized Loans.
To apply for a Federal Direct PLUS Loan, a
student's parents must complete a Federal Direct
PLUS Loan application, available at the student's
Note that before receiving any loan funds, students
and parents will receive promissory notes to
complete and sign. The promissory note is the legal
document stating the borrower's obligation to repay
the loan. The note also gives important information
about the loan, including terms and conditions.
Schools will provide counseling on loan terms and
How much can students and parents borrow?
The maximum amount a student can borrow each
year for Direct Subsidized and Direct Unsubsidized
1st year undergraduate:
2nd year undergraduate:
3rd and 4th year undergraduate:
*A dependent student is one who does not meet any
of the criteria for an independent student.
**An independent student is one of the following: a
student who is at least 24 years old, married, a
graduate or professional student, a veteran, an
orphan, a ward of the court, or someone with legal
dependents other than a spouse.
The amount a student can borrow is also limited by
the student's school costs, other financial aid the
student may receive, and (in the case of Direct
Subsidized Loans), the student's EFC--see page 6.
The overall limits for all subsidized and
unsubsidized loans (including a combination of
FFELs and Direct Loans) are
+ $23,000 for a dependent undergraduate student
+ $46,000 for an independent undergraduate student
+ $138,500 for a graduate or professional student
(including loans for undergraduate study)
The parent of a dependent student can borrow up to
the cost of the student's education minus other
financial aid the student receives.
NOTE: All Direct Loans except Direct Consolidation
Loans have an origination fee of 4 percent that is
subtracted proportionately from each loan
disbursement. This money goes to the federal
government to help reduce the cost of supporting
these low-interest loans.
What is the interest rate for Direct Loans?
Interest rates are variable and are adjusted each year
on July 1. The maximum interest rate for Direct
Subsidized and Unsubsidized Loans is 8.25 percent.
(In 1995-96, the interest rate was 8.25 percent.) For
Direct PLUS Loans, the maximum interest rate is 9
percent. (In 1995-96, the interest rate was 8.98
How are loans repaid? Can borrowers arrange for
affordable monthly payments?
There are four ways to repay a Direct Subsidized
Loan or Direct Unsubsidized Loan. Direct PLUS
Loan borrowers may choose from the first three
options on pages 10-11. Borrowers can choose a
plan to fit their financial circumstances and, as
mentioned earlier, can change plans if their financial
To find out more about repayment options, a
borrower can contact the school's financial aid
office and/or the Direct Loan Servicing Center (see
the information on the inside cover of this
These are the four repayment options:
+ The Standard Repayment Plan requires fixed
monthly payments (at least $50) over a fixed period
of time (up to 10 years). The length of the
repayment period depends on the loan amount. This
plan usually results in the lowest total interest paid
because the repayment period is shorter than under
the other plans.
+ The Extended Repayment Plan allows loan
repayment to be extended over a period from
generally 12 to 30 years, depending on the total
amount borrowed. Borrowers still pay a fixed
amount each month (at least $50), but monthly
payments usually will be less than under the
Standard Repayment Plan. This may make
repayment more manageable; however, borrowers
usually will pay more interest because the
repayment period is longer.
+ The Graduated Repayment Plan allows payments
to start out low and increase every two years. This
plan may be helpful to borrowers whose incomes
are low initially but will increase steadily. A
borrower's monthly payments must be at least half
of what he or she would pay under Standard
Repayment. As in the Extended Repayment Plan,
the repayment period will vary from generally 12 to
30 years, depending on the total amount borrowed.
Again, monthly payments may be more manageable
because they are lower, but borrowers usually will
pay more interest because the repayment period is
+ The Income Contingent Repayment Plan bases
monthly payments on the borrower's adjusted gross
income (AGI) and the total amount of Direct Loans
borrowed. The required monthly payment will not
exceed 20 percent of the borrower's discretionary
*Discretionary income equals AGI minus an
amount based on the poverty level for family size,
as determined by the U.S. Department of Health and
As the borrower's income rises or falls each year,
monthly payments will be adjusted accordingly.
Borrowers have up to 25 years to repay; after 25
years, any unpaid amount will be discharged, but
borrowers must pay taxes on the amount
Income Contingent Repayment is not an option for
Direct PLUS Loan borrowers.
If, because of exceptional circumstances, a borrower
cannot repay his or her loans using one of the
repayment plans described above, the Direct Loan
Servicing Center may be able to offer an alternative
plan. Such a plan would be provided only on a
Borrowers who have any questions about Direct
Loans should contact the financial aid office or the
Direct Loan Servicing Center.
HOW TO REACH US
Applicant Services/Loan Servicing
working hours are from 8 a.m. to 8:30 p.m. (EST)
U.S. Department of Education
Borrower Services Department
Direct Loan Servicing Center
P.O. Box 4609
Utica, NY 13504-4609
TDD: (800) 848-0983
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